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Dollar down as worries about European banks ease

By Blake Ellis, staff reporterJune 30, 2010: 4:53 PM ET

NEW YORK (CNNMoney.com) -- The dollar slipped versus the euro Wednesday after the European Central Bank said demand for loans was weaker than expected, signaling a brighter outlook for the European banking system.

What prices are doing: The dollar fell 0.3% versus the euro to $1.2225, and it was flat against the Japanese yen at ¥88.62.

On Tuesday, the dollar gained as worries about the global economic outlook rattled markets and investors sought a safe haven.

What's moving the market: The European Central Bank's year-long lending program is set to expire Thursday, and investors have been worried about the repercussions of cutting off funds to banks that have become dependent on the liquidity.

But fears eased slightly Wednesday after an offering of 3-month loans from the ECB was met with less demand than expected, signaling that European banks may not be in as much trouble as investors had previously thought.

The €131.9 billion that 171 banks borrowed from the ECB came in less than the €210 billion analysts had expected the central bank would need to lend, according to a Reuters poll.

"Strong demand would have meant that banks were still leaning heavily on the ECB for life support," Kathy Lien, director of currency research at Global Forex Trading, said in a research note.

"The weaker-than-expected demand for the tender suggests that banks, particularly Spanish ones are not in as bad shape as everyone had feared and that credit is not frozen," she added.